Rebellion at DataRobot over insider stock sales
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But the "secondary's for founders" is not that unusual - it's typically used as a tool by VCs who are in competition with other corporate development opportunities.
AKA Clubhouse had several suitors for acquisition (including Twitter it's rumored) but Andreesen added a few million bucks of liquidity for the founders to bridge the gap between "guaranteed liquidity" vs "non guaranteed but potentially greater upside" (1)
But then of course you have all sorts of eggregious examples over the past several years of Johnny Boufarhat @ Hoping taking $100m+ out or infamous Adam Neumann pulling out $700m+ from WeWork(2)
(1) https://www.forbes.com/sites/alexkonrad/2020/05/15/andreesse...
Sometimes the executive team gets stock options rather than RSUs so they own the stock and can sell to secondary parties. VCs and founders would like them to sell to known parties rather than sell on private market (Facebook crossing 500 investors threshold was one important reason for IPO timing [1]).
[1] https://web.archive.org/web/20120517045249/http://blogs.reut...
They also need to adjust comp structure. I've had a few offers to be engineer #1 at this hot startup or that, some of which I thought had a good chance of success. Assuming the best case scenario I always found the following to be true:
1. Founders would outearn me 100:1
2. Given any reasonable assumptions around likelihood we fail, the E(V) of the offer was less than I make now.
3. Founders could, at any time before IPO, completely screw me out of my paper gains e.g. via an acquisition.
I've always pointed out it's possible to make me an offer I'll take, the resources are there, but no one bites. This is absolutely killing a lot of otherwise potentially great startups. I've seen some fantastic business ideas fall down in execution because neither founders nor investors could bear to let key employees share more of the spoils and be equally protected from the downsides.
I think there are a few things that explain the phenomena:
1. You're asking rich and powerful people to give up control. Everyone hates giving up control, but my experience is that people accustomed to control hate it more.
2. It's not familiar, which means it feels risky.
3. It objectively lowers total payout in the best and worst case scenarios for power, and it's not actually clear the E(V) for the capital class goes up. It might, but no one knows apriori, and it's expensive to test.
This mix of low information, a small number of potential actors, and feelings of anxiety around uncertainty and loss of control is a pretty potent mix for inefficiencies like this to persist IMO.
If an employee #1 share grant isn’t for you (as it isn’t for me), there are plenty of other capable engineers out there who are willing to take a lower stake for a variety of reasons.
I don't think this is an accurate representation of my views. I'm happy to take more in the 2-3x range so long as I'm protected from the founders cashing out while screwing me out of my paper gains.
> there are plenty of other capable engineers out there who are willing to take a lower stake for a variety of reasons.
Maybe, but they can't always find them! Businesses rarely fail for one reason but maybe 1/3 of the startups that approached me and failed were bogged down by poor technical decisions made early on (what's that? your engineering lead with 3 years of experience set up a totally custom kubernetes cluster and it's slowing down your execution? Man that's rough!)
Now you want to give a lot of small shareholders liquidity. The pricing is far more often. The whims of the world plus poorly negotiated deals can make a small sale be far below the last investment price. Psychologically this is bad even for wealthy investors and investing is heavily based on psychology.
No one wants to let that happen except the employees. The founders, the board, and the earlier investors don’t want anything that can jeopardize their argument for what their shares are worth.
In regards to the very first 1-2 employees, from what I have seen is that they are either a) fairly inexperienced (and therefore willing to take lower compensation), b) very excited about the technology and willing to work for less compensation, or c) very experienced and compensated well and/or given a ton of shares to the point where they may even be considered a founder.
So if you are employee #1 and you are very experienced and can negotiate for a nice chunk of shares, you almost always will get pulled into the founding team. It is not uncommon for startups to have minority founders that have 5-10% of the shares.
And that means when you hear about an early employee complaining about their compensation, they are most likely going to be from category a or b. You aren't going to be hearing from category c, because they were treated well and might even consider themselves founders.
And to add to that, should they decide to leave and have to exercise their options, they'll be on the hook for a huge tax bill had they not been allowed to early exercise and file 83b letters.
https://allthingsd.com/20110602/where-did-groupons-billion-d...
> The article brought attention to other things not going right at the company. For example, DataRobot sent its top salespeople on a lavish trip to The Virgin Islands just days before laying off 7% of employees.
This trip is not necessarily a bad thing to have done, and more likely than not a good thing. You need your sales team properly motivated.
Sales people have their own culture, and if you don't understand it you'll have a hard time recruiting and retaining an effective sales team. Actually you'll have a hard time recruiting the VP of sales who will build and manage that team for success. The good ones are ultracompetitive. You didn't make top producer for the quarter? Well I'm still excited at the number that person made because it shows how great our company is, but fuck, I'm gonna blow that shit out of the water next quarter.
I've been to the sales meeting junkets as CEO. They love to hear from the CEO...briefly. Rev them up and get them excited that this company is going somewhere BIG. Then get off the stage, give it back to the VP of sales, and leave. The VP is their boss, their protector, and makes sure the comp and commissions are paid. The CEO has to balance all sorts of things. The VP has to...bring in the revenue!
Obviously people like that would hate to work in engineering, and you wouldn't want to work with someone like that on your engineering team. Different worlds.
It's very common in tech companies for engineering to shit on sales (why won't they just go sell what we've got?) and marketing (our product is so great, what do this assholes do anyway?) sales to shit on engineering (those shits just say no all the time and never work on what the customer really wants). The effective companies are where they respect each other and realize that their cultures are different but that they need each other. I'm surprised how infrequently I see that.
nice reward for missing sales by that large margin.
what you said is true and needs to be done in a healthy organization, but DataRobot seems to be not in a healthy state
Except the sales executives of course.
Having been on the receiving end of their sales team, I'm not surprised. Approaching a clueless executive and feeding them all sorts of BS to get their product foisted onto the data science team I was with was very disagreeable.
To cancel such a trip would effectively be retroactively eliminating a bonus for top performers.
I find people often underestimate how much employees cost and overestimate how much things like a Vegas offsite cost.
Even if you send a team of 20 to The Virgin Islands at say $10,000 a head, that's only $200,000. That pays for what, 1-3 salaries for the next year?
Layoffs don't happen when companies are broke and cannot afford to spend money on anything. They usually happen to _prevent_ companies from going broke.
If a sales team taken on rev-em-up blows someone’s morale the company’s culture is broken. The reaction betrays a lack of trust in management. Suspicion they’re acting for non-company promoting reasons. Management needs to figure out why that trust gap is there and address it directly, not put forward another act where feel-good measures that compromise the company are taken because they’re easy.
Well, those would seem to have been well-founded suspicions in this case.
Engineering: Works hard (45 hrs/wk), knowledgeable and experienced at their craft, specialized skill-set, net compensation... $150,000.
Sales: Works hard (55 hrs/wk), knowledgeable and experienced at their craft, specialized skill-set, net compensation... $600,000.
That always felt like bullshit to me. Two hardworking, skilled people, but just because the sales people are closer to the money, they get paid a shitton more.
In fact, (and I say this knowing that I'm biased, but it's still keenly, emotionally felt), it often felt like thee engineer is far more skilled, rare, and value-producing than the salesperson. They just, again, aren't the ones directly bringing in the money.
I also lack both skills and desire to sell. The job sounds like a nightmare to me. So I don't begrudge those that are good at it and earn those commissions. I envy the comp, but it'd be silly to be jealous when I wouldn't actually switch places with them. $150k is great money in its own right.
How about we just agree that companies should pay me more doing the exact same job I already know and enjoy? :]
Another thing I forgot to mention, your best sales people can and will take their customers with them if they go across the street and work for your competition. I've also seen that happen with disgruntled high-performers. We basically lost an entire region a few years back when the star sales rep there decided to go independent and steer her enormous client base to a rival provider.
Everything is extreme in sales. The best earn more, the worst barely make rent.
And this has been validated by multiple court cases: the sales person owns their "rolodex" (that shows how long this has been the case).
Want to know why every company has a CRM? The CRM companies will tell you about all the integrations etc but the real reason is that they can keep their hands on all the contact info when the sales person leaves.
Even if the Sales team happens to hit a home run in a particular quarter, you can bet that Finance will raise targets for the next cycle, and it'll be twice as hard to hit it again. So on a functional company you won't be hitting all goals every time, and the annual income for sellers evens out.
Worth mentioning that, depending on the pay arrangement (individual vs. team-based goals), one specific individual may make a lot more than the average, but the team as a whole won't be making the same.
Ultimately the main difference is between being on a Sales plan (with lower base + higher variable/risk), vs. a more traditional plan with base + stocks + performance bonus.
Also, the average "$150K engineer" is more like a "$300K engineer", at least in the US [1].
E.g. You spend a week optimizing the database. How much is that worth? Does it allow the front end designers to abuse the db more to push more in features?
It's clear that without you the features couldn't be written, because the frontend folk haven't understood query optimization to save their lives. Meanwhile the sales team skipped the infrastructure planning meeting to go on their golf outing.
But sales have direct dollar amounts. It's easy to quantify. That money wouldn't exist without the sales person. On the other hand, those features wouldn't exist without your backend knowledge.
And was probably fired in a year or two for not making their numbers. Whereas assuming a reasonably financially stable company, the lower end of band engineer is probably trundling along.
The sales person's job is quite precarious and the tenure is often quite short.
Sales people (except the VP) rarely get options. It's all cash.
Effective companies have compensation structures which incentivizes such respect.
Sales should make a tonne of money upfront, especially those hitting significantly higher than OTE. But a sales person's work is of very little use to the company after they leave the job. Engineers should be paid significantly more equity - their work has significant residual value to the company long after they leave the job.
When this dynamic is explained to both functions, they learn to respect the other:
* engineers are not rushing to implement whatever hack you are suggesting because they own significant equity in the company and want to see it grow in value; they are not getting a cut of your commission check.
* sales is being paid high because it takes a certain kind of person to close the deal, and us hitting those revenue goals is how your equity will grow in value.
Sales should make a tonne of money for closing good, big deals. But actually I never pay it all out up front; I pay it out as the deal progresses, including renewals. I've even paid out after the sales person has left, because the payments were set up only to pay out as the customer and company continued to be happy.
The sales folks typically don't like that of course -- most are quite transactional. But if they make more money that way, they'll be happy (or will leave).
I'm always sorry when a dev leaves, even if it's for good reason. A lot of devs often feel an emotional investment in their employer, which often lingers to some degree after leaving. A sales person, on the other hand, thinks their company is the greatest until the day they depart, after which they often don't care at all. I am less often unhappy when a sales person departs, unless they were a huge earner.
In my experience huge earners mostly just got handed the best customers.
You need the rest of your team motivated, too. Optics are a thing. I understand your point and don't wholly disagree, but send them to something within the country or even within the same state. If you weather the layoffs and right yourself as a company, then send them to the Virgin Islands again.
Instead, now you've got a company whose sales team is motivated, but every other department is confused, nervous and anxious. Hell, there's probably even some animosity being built up towards the sales team, which will add to the interdepartmental bickering that you alluded to.
Edit: In the context of the article/DataRobot specifically, I'd argue that the trip only adds to DataRobot's existing pile of shit in a way that overshadows any potential benefits. Morale seems to have been really low pre-trip.
If everybody respects each other they'll understand (I say this from experience). It's more like, "yuck, I'd hate to be one of those people but wow, I'm sure glad they are bringing in the money that pays everybody's salary". Frankly I was glad I've never been asked to / had to attend n entire sales meeting. It's really not my thing (I have "carried a bag" -- i.e. lived off my commission, when I had a mortgage and a wife who didn't have a work visa to support).
And remember a sales person's job is far more precarious than a developer's, or almost anyone else's. Miss a quarter and you can be canned on the spot. Miss a big deal you've been working on for 18 months can mean the same. Actually, depending on the company's sales cycle, being too far behind after the first month of the quarter can get you ejected.
From that article, the new management of datarobot weren't trying to build a solid business, but rather extract the maximum amount they could.
Err yeah, 'cause Sales are solely responsible for that and not every department in the company as a whole.
Everyone thinks you can get large trips refunded at the last minute and it's common for someone to point out that's not how the world works. But what they'll be missing here is how far out were the reservations booked, and if we're doing layoffs now, what does it say about the executive team's ability to forecast? At least they weren't yet willing to admit to themselves that next year was going to be tough, or someone has been lying to the rest of the team about how things are, in an effort to... what? Get one more bonus? Keep morale up?
If people get demotivated by that, then they were one incident away from demotivation already and you fucked up a long time ago. Which is unpleasant to do and so people will procrastinate.
Every time I hear something like that, I can't think of a positive comparison. Feels like the stereotypes like "boys will be boys, that's just how they behave", "of course soccer will always involve fights", etc. When I hear about ultracompetitive sales I'm reminded of all the sales people that try to scam you, promise things that are not possible, and chase with multiple follow ups to private comms.
> I'm reminded of all the sales people that try to scam you
Yep, there are a lot of people like that and you need to get rid of them as soon as you realize you hired one. You experience them in the company too. Build your comp plan so that you pay out for the successful deals (to the degree that is within the salesperson's control -- it's not their fault if engineering does actually screw up.). Pay out more for long term customers (often companies pay less, figuring it's less work to renew, but this incents the sales person to sign a good deal and make sure the customer is happy).
I've seen all sorts of screwy attempts: contract contains development terms not signed off by engineering ("hey, the prospect already signed it, how can you refuse to sign it???). Don't book a deal until you have both a signed contract (by both sides) and a signed purchase order. I've seen plenty of sales people send in one or the other, or both but with a signature missing ("they guy went home but will be back in the morning") on the last day of the quarter in the hopes of hitting their target or getting into the escalation zone. Refuse to put up with that crap.
It's like having a child. Any pretty much any of the good sales folks, if you told them that they'd probably nod, say "yeah", and laugh. And then go earn more money than the CEO.
In a previous role, I was the engineer who had to install what the salesperson sold (regardless of whether it fit the customer's actual needs). Even when it was the salesperson's fault, the engineer got the blame.
And a principle of good management is that the situation symmetrical: if the engineering is impossible it's the responsibility of the person who signed off on it, not the team trying to deliver.
This is in the same bucket as those who write off several personalities that do well as coders as some combination of neurotic, antisocial and/or weak. Can you find humorous or even personal anecdotes matching the stereotype? Sure. Will carrying that stereotype harm your ability to interact with those people, even biasing your interactions to the worst in their lot? Obviously.
If sales folks were promoted based on their numbers over a rolling multi year window I imagine the dynamics would be a lot different.
This is so very important. All of the teams in a business are critical to success. The best product in the world (engineering) is useless if noone knows about it (marketing), can't buy it (sales), or can't make it work (training and support).
There are multiple legs to the stool, and as I see it, it's the CEO's job to make sure all of these different personalities, tensions and constraints are balanced - and that everyone understands why everyone else is there.
Sadly, CEOs are often just sales people with a fancy title, which can lead to all sorts of nightmares.
If you promise a lavish trip to the Virgin Islands to your sales staff for hitting certain numbers, you must deliver that lavish trip when they hit those numbers.
Imagine if you were promised a specific bonus check if your team hit certain goals. Your team works hard to hit those goals. Then management tells you times have changed and you won’t be receiving that bonus check despite keeping your end of the bargain. Most people would start looking for a new job immediately, or at least lose motivation altogether. Nobody wants to continue working somewhere after a bait and switch like that.
Shut the front door. We're valuing companies based on rounds that caused less than 5% of the shares to change hands? How long has that bullshit been going on?
$300M is 1/21st of the valuation, or 4.76%. That's a vote of confidence sure but not a particularly large one.
It might roughly have an association with soemthing real.
- companies say they are worth price-per-share * number-of-shares but investors tend to get preferred shares which ought to be worth more
- valuations may be driven by competition between investors, how desperate the company is, the state of global financial markets, etc.
That’s basically how public stock exchanges work except normally in much smaller quantities than typical round. What’s not bs then?
And some people think the stock market is a bit bs, yes. It’s less pyramid than an MLM, but I think we’re about to find out some things when the boomers start running out of money.
Venture capital math says that if your parents pay you $1 in anticipation of getting to claim 5% of the contents of your piggy bank when you open it, that there are now $20 in the piggy bank.
Note that I'm not trying to say you're wrong. It is bullshit. Rather, I'm saying that the bullshit runs very deep.
Not particularly likely to happen, but perhaps we can push towards this somehow? Because otherwise that stock loses much of its worth as compensation.
We also have former DataRobot employees who have taken out exotic stock loans to cover $100,000-$1.000,000 worth of stock purchases and have been begging our executives to let them sell.
> The article brought attention to other things not going right at the company. For example, DataRobot sent its top salespeople on a lavish trip to The Virgin Islands just days before laying off 7% of employees.
This is a misunderstanding of how sales compensation works. Individual sales people are paid a low base salary, and earn a commission on sales. Reps carry a quota of new revenue they are supposed to land. Their base pay + commission if they hit quota is a pretty good take home, like a mid to senior engineer.
Above quota, sales gets accelerators. Instead of say 15 or 20% commission on a deal, they get 25%, 30% or more. Accelerators keep compounding. The best Sales people are the highest paid individuals in a company. Outside of public companies, top sales people make more than the executives.
Part of that compensation is “presidents club”. Different companies call it different things. It’s a trip or perk for the top sales people. People who are hitting 150%-200% or more of their quota. The reps not hitting their targets are no going on these trips.
So yeah, telling your top sales reps Melanie or Marco, who each personally generated millions of dollars for the company and exceeded their personal targets, that they don’t get to go on their trip because some other sales people sucked so much at there job the company missed a target is not an acceptable option. Definitely not if you want to keep those top reps, which you do, because they sold double their quota.
TLDR: these trips are part of compensation for the people who are exceeding their targets. Don’t fuck with their $$$
Yeah. Like I believe that. They use their connections and moxie to justify that at the expense of everyone else creating legitimate value like all the employees that have to support the crap they sell yet never see a nickle of those commissions.
I get what you’re saying and agree in principle but no top engineer who may have contributed as much if not more is getting such perks in a company that undergoes layoffs. So maybe pick less flashy perk to reward sales top performers?
Sales people do perform an important business function and it can involve a lot of skill, from knowing the product inside out to knowing the customer and competitors. But salespeople sometimes close deals by making technical promises on which they won't have to deliver, and often communicate poorly with other people inside their own company.
The investors will be sure to keep you tied in, and that money can massively derisk the project for you. I encourage every founder I speak to do this.
Non founding executives with short tenure doing the same is a little shadier, but everything is a negotiation and nobody was forced into the transaction. A rank and file employee can push for whatever they like - more money, stock or even liquidity if they have enough perceived importance.
Look at it from the other side. Say an exec joins a series C business and plays a big role in growing the company to 3x revenue in 2 years. At the next raise they ask to cash out some equity to buy their beachfront house. Seems a fair enough ask, and with that track record it would probably be worth investors writing the cheque.
In your last case, if someone wants to cash out equity but employees can't, then you've destroyed trust and your company may fail in the future because the employees can't trust you to protect their equity.
VCs who sign up for these deals should think more than one step ahead.
I'm sure it's legal, but it absolutely is fucking the employees over. Saying "the employees could have negotiated better" is kinda just playing the thunderdome card. Employees can't reasonably prevent company insiders from fucking them over with stock shenanigans. That's part of what makes the practice so insidious, and why public stock markets are so highly regulated.
Yes. The SEC used to prevent insiders from selling stock until two years after the IPO. That ended some time around 2006, I think.
it is venture capitalist's fault for signing up for this deal, that KILLED a company. Sure, they bribed executive to sign term sheet by allowing him to cash out, but now the entirety of DataRobot is going to be worth 0. VCs basically destroyed value of their LPs.
next time, VCs should think about employees who put hard work and keep company operating, not only executives.
Without people - any startup is just a worthless legal entity.
Absolutely not, Capitalism required democracy a system of justice and many other attributes of modern state. 'Law of the jungle' is niot capitalism and does not produce functional society.
Corruption is probably a bigger threat to these rights than nominal form of government; I'd say what is really needed is a strong tradition of rule of law.
I'm not going to bat for the executives at all, but given the opportunity to take $22m off the table ala Dan Wright, why wouldn't you? Shame on him but he'll wipe his tears with hundred dollar bills. Why did the Board approve this sale — that's the real question.
The same situation should apply here. Employees are typically minority shareholders and as such, should get some basic protections. Early liquidity has significant value. I'd bet that plenty of employees would give up a percentage of their equity in order to cash out at least some of their shares early. Giving this ability to larger shareholders and not to smaller ones is very similar to saying that only large shareholders get to share in profits.
If you want peak performance from your employees then leaders eat last.
The way the company is perceived; both in and out; is really up to them.
I remember the company I worked with (a highly reputable Japanese company) made a deal with an SV startup. It was a great startup. The people behind it were the "real deal." Some of the most brilliant people I've had the honor to work with. The tech was risky as hell. I think a number of mistakes were made by the beancounters and executives that inked the deal. The Japanese company basically became VC shareholders of the startup. They paid several million dollars, in a few tranches.
We worked our asses off, in that deal. People in all parts of the relationships were burning themselves out. Like I said, risky tech. Things ended up not working out as planned.
After one of the tranches, one of the founders went out and brought a top-of-the-line Model S. Pissed off the Japanese, something fierce.
Things went south, fairly quickly, after that. I don't think it was the cause for the breakup, but it lost the startup some powerful friends, in Tokyo, when they really needed them.
However, Japanese executives make a fraction of what US execs make, and work in more difficult conditions. VPs that control billion-dollar budgets have desks that schoolteachers would sniff at.
Like I said, optics.
It’s not a good idea to piss off people that sign the checks, or will have your back, when you report failure.
Of course, you're correct in saying that everything is a negotiation. Rank-and-file employees should have accounted for the risk that they'd get screwed over by the founders and required more cash or equity to compensate for that risk. But I worry about a future in which the best talent refuses to work at private startups because the risk of getting screwed renders employee equity next-to-worthless. Arguably we're already there.
The company not only has to do well, it has to decide to actually IPO, and then there are lockout dates, and it’s always given as options instead of straight grants, and the vesting, and all the other constraints that I’ve forgotten. I’ve just valued them as zero when considering offers and only consider the salary portion which has the insidious(for employers) effect of making me unaligned with the companies best interests beyond the end of the week.
Talking to my coworkers at every place I’ve worked it seems like a common feeling.
Granted I’ve never worked at a unicorn company or faang so it might just be a function of working for less competent employers who are cargo culting compensation and don’t understand how it’s supposed to bind the employees to the company having a good future
It seems like a lot of companies are so afraid of their employees gaining any sort of value out of the company that they’d rather risk failure than risk the situation being a win/win. The employers aren’t completely brain dead and they seem fine enough at negotiating and evaluating risk when it’s company to company negotiations. I can only assume it’s some cultural component of the wealthy class that leads to the continual self sabotage
For earlier stage startups...yeah, I dunno. To be clear, I think the illiquidity and vesting period and all of that are basically fine, well-understood risks, and in principle startups can offer enough equity to compensate "true believers" for those risks. What gets me is the really shady unforeseeable stuff, like converting part of the acquisition price to retention bonuses avoid paying out ex-employees for their vested equity. Between that unquantifiable risk and the inherent risk and illiquidity of early startup equity, I'd personally discount the 409a valuation by something like a factor of 5 when evaluating a job offer from an early-stage startup.
I don't see a ton of people leaving FAANG or similar companies for early-stage startups, but obviously there are lots of engineers outside of FAANG companies, and I'm sure it helps that valuations are rich enough (or were until recently) to compete with non-tech companies on cash comp.
It would be a lot simpler and cheaper to just grant stocks and then the calculation for employees is easy, you get paid big bucks of the company succeeds. The employers that are not doing that signals to me that they value keeping compensation down over actually having the company succeed
If you grant stocks that means the company makes you part of the investor class subject to investor class level regulation. That leads to having investor class level benefits if the company succeeds.
If you’re implying that the convoluted equity packages companies offer as standard to employees now is better for them, then why aren’t founders or investors taking similar deals? I think that’s really the heart of the issue. Founders and investors are taking one type of deal, but then telling their employees they need to take a deal so bad that they would be insulted if you offered it to them.
Just pay their taxes then?
If you give an employee 100 stocks, valued at 100$ each, with a tax rate of 25% - 7500$ net wealth, you should rather give the employee 75 stocks and 1875$ (==tax on 75 stocks at 25%) - 7500$ net wealth.
I will see myself out.
Companies never promise this. The employees who chose this stupid fucking startup over their families are also immoral.